New Dilemmas of International Banking Standards: Financial Stability and Business Activity Tradeoff

The development and implementation of new regulatory standards to prevent crises and increase bank stability became common in recent years. These standards are aimed to maintain the financial stability of banking sector, but the results of their practical implementation are not so clear. The subject of research is the analysis of the new capital requirements and financial leverage indicator introduction impact to the credit institutions business model. The authors examined innovations in regulatory capital requirements of credit institutions, adopted by the Basel Committee on Banking Supervision (Basel III). The presented review of scholarly literature is devoted to the possible multiplicative effects of the implementation of the Basel standards. Regarding Russia the improvement of the bank capital quality and adequacy stimulating in conditions of economic instability can negatively affect to the credit institutions business activity. The new financial leverage indicator introduced by Basel III, is calculated by banks for reporting purposes in Russia and is disclosed by them from January 1, 2015. The authors of the article expect that the financial leverage standard will have a weak effect on the banking sector in comparison with capital adequacy indicators based on risk. The role of this indicator can be more significant at the macro level. It can be considered as one of the early warning indicators of the credit institutions that are used to take preventive measures by the Regulator. At the same time, the introduction of this indicator can have a strong effect on banking sector business activity. The authors carried out analysis and concluded that exceeding the planned level of financial leveraging, banks formed a high-risk asset portfolio. The quality of this portfolio is not «captured» by the new coefficient. The authors are convinced that the leverage coefficient level should be differentiated for banks with different business models.

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